Caught in the web

The Internet is bound to do serious damage to the newspaper business

IF AMERICA'S newspapermen were looking for comfort, Intel's Andy Grove was not the man to invite to their annual conference in San Francisco in April. “You are under attack from both sides,” he said—on the advertising side from companies such as Internet auction houses, which are usurping the classified business, and on the editorial side from online news services. He gave them three years to adapt or die.

The idea that technology raises questions about their future is not news to those in the newspaper industry these days. What they want is answers. In their worst nightmares, they fear that newspapers may be to the communications business what the horse and cart were to transport. That is what the capital markets are telling them. Even after the recent slump in high-tech stocks, the entire publicly quoted American newspaper industry is now worth less than America Online (AOL), an Internet portal.

Of course, that may simply be a numerical freak spawned by online traders' over-excitement about Internet shares. After all, every time a new medium has come along, the death of the newspaper has been announced; yet newspapers are still with us. They survived radio; they survived the enormous visual and emotional power of television; and, financially, the industry is in relatively good health right now. In most of the world's rich countries, newspaper revenues are at record levels. In 1998 American newspapers' advertising revenue, at $43.9 billion, was up by 6.3% on the previous year.

But the figures are not as healthy as they look. Yes, newspapers' advertising revenues have been growing fast, but that is because overall spending on advertising has been growing faster. Their share has, in fact, been shrinking: in America, from 24.4% to 21.5% between 1993 and 1998. No medium, not even network television, suffered a bigger drop. When the next recession comes, the newspaper industry's advertising revenues are likely to look bleak.

What is more, circulation is in decline (see chart). It has been falling for 35 years in Britain and 30 years in France. In Germany circulation has done better (perhaps boosted by the gripping story of the end of communism), but it peaked in 1991 and has been falling since then. In America, where population growth has helped newspaper sales, circulation started falling more than a decade ago. According to the 1998 Media Usage Study by the Newspaper Association of America and the American Society of Newspaper Editors, 67% of the population read a daily paper regularly in 1977; 20 years later, the figure had fallen to 51%.

Publishers shudder when they look at the demographics of newspaper reading: the young do much less of it than the old and the middle-aged. That, if Peter Kreisky, head of Mercer Management Consulting's media practice, is right, has worrying implications. He argues that reading newspapers is a habit, like smoking, that is acquired early in life, maybe from watching Dad unfold this emblem of adulthood at the breakfast table; and if the habit is not acquired early, it is never acquired at all.

The problem is competition—not specifically from any other medium, but, more generally, for people's time. Over the years, technology and economics have produced more and more ways of occupying people's leisure hours: more television channels, more magazines, more theme parks, and now video games, chatrooms and all the other delights of the digital age.

The consequences for newspapers are already visible. “There has been an enormous, slow-motion implosion of the industry,” says Philip Evans, senior vice-president at Boston Consulting Group.

New York city, for instance, used to have four newspapers. In 1995 Newsday pulled out of Manhattan to concentrate on the suburbs. Of the remaining three papers, the New York Times is profitable, the New York Daily News has struggled from crisis to crisis while losing circulation and the New York Post has been winning circulation by keeping prices down, presumably at the cost of its bottom line.

In Britain, two of the four national broadsheets, the Times and the Independent, are thought to be losing money. London, which used to have two evening papers, now has one. And in France there was a national newspaper strike in April over the sale of the company that owns France-Soir, once Paris's top-selling paper, for one franc.

When the Internet first engaged the attention of the newspaper industry, it looked like a new, cheap distribution medium. Newspapers began to put their copy on sites that looked like replicas of their front pages. They worried about issues such as whether to charge for access to their sites; whether to put up all their content, for fear of seeing their print sales cannibalised; whether to increase their staff to update their copy more often; how to charge for advertising.

There were some clear advantages to publishing on the Internet. To papers such as the Washington Post or the New York Times, with national brands but far-from-national distribution, the Internet offered a way of getting the paper around more of the country. These publications have the two most popular newspaper sites on the Internet. For the Wall Street Journal, which people read more for information than for fun, the web provided an opportunity to sell other products, such as data and analysis, along with the paper.

The great unbundling

The Internet, however, will prove more than a new distribution channel for news. It is going to undermine the economics that underpins the newspaper business.

Newspapers feel like a natural feature of the landscape, but they are no more so than canal boats or smokestack factories. Like them, they are the product of a particular stage of technology. A newspaper is a bundle of goods and revenue streams brought together to amortise the cost of a printing press, and to pay for newsprint and a distribution network. The goods are the different editorial sections, stock prices, the weather forecast; the revenue streams are classified advertising, display advertising, promotions and the cover price.

The printing press, the paper and the distribution system are necessary to produce the content that attracts the readers; the readers are necessary to attract the advertising that pays for the physical inputs. Because the initial costs of putting together a newspaper are considerable, the barriers to entry into the business are high.

Get rid of the need for physical inputs, however, and the economics of the business changes completely. Once the barriers to entry disappear, so does the rationale for the package of content and revenue that makes up a newspaper. Now that being a publisher costs so little, niche publishers can pick off speciality areas of content—the weather, say, or the stockmarket—and build a business around them. Classified advertisers can set up their own sites where prices to advertisers are likely to be lower because they do not have to pay for the physical inputs or subsidise the content. The newspaper, it turns out, was a hundred different businesses rolled into one; and, now that the economic glue that held them together has dissolved, they could fall apart.

The threat to classified advertising poses the biggest problem for newspapers. In America, according to Morton Research Inc, a consultancy in Bethesda, Maryland, classified made up around 30% of newspapers' total revenues in 1998. In Britain, according to the Advertising Association, it made up 12% of national newspapers' revenues and 51% of regional newspapers' revenues.

Without classified advertising, most newspapers would find it hard to survive; and classified is the bit of the bundle that is most vulnerable to the Internet. The newspapers' problem is not just that techies like surfing the web; it is that classified works far better on the Internet than it does on paper. The Internet's reach means that a job search is not limited to the boundaries of a particular paper's distribution network. If you are in San Jose, California, looking for a job, you can check out your prospects in San Francisco, New York, or even Singapore. In America, with its mobile workforce and local newspapers, the Internet makes life easier for both buyers and sellers of labour. It is less relevant to a country such as Britain, where people are geographically stick-in-the-mud and the important newspapers are national.

The advantage of the web's “searchability”, however, applies everywhere. On the Internet, you do not have to spend hours riffling through pages of newsprint to find the job or the house that you want: you type in your criteria and see what comes up. It takes a minute, rather than an hour, and you don't get your fingers dirty. Some companies have cut out advertising as such altogether: many Silicon Valley firms use their own websites to post job vacancies.

The web has given other sorts of classified advertising a new life. Those gloomy little personal advertisements, the ones offering Auntie's Chinese vase or a second-hand exercise bicycle, have spawned a new form of entertainment. Decent folk readily admit, these days, to being online-auction junkies. Cyberspace sometimes seems to have turned into a gigantic car-boot sale. Companies such as eBay are the beneficiaries; newspapers are the losers.

Classified advertising has become so popular on the Internet that it has turned into a destination in its own right. Yahoo! is one company that posts people's classifieds for free and, using them to attract eyeballs, makes money by selling banner advertising on the site. That is just fine for the advertisers, but not for the businesses that depend on making money from this kind of advertising.

America's newspapers are at the sharp end of this battle for survival. Some—especially those on the west coast, the most wired bit of the world—are beginning to report falling revenues from classified advertising. According to internal reports, help-wanted advertising at the Los Angeles Times fell by 8% between the fourth quarter of 1997 and the same quarter of 1998; for jobs in information technology, the fall was 15%. At the San Jose Mercury News, classified revenue in 1998 was down by 8% from the previous year's level, and help-wanted revenue by 15%.

A year ago, few newspapermen would have admitted the danger. Now they talk openly about it. “We're going to lose share to the Internet,” says Jack Fuller, publisher of the Chicago Tribune, one of the most forward-looking of the newspaper companies. “We just hope it will be to our Internet.”

The newspapers are trying to recapture lost ground by taking their classified to the web. They are finding it hard going, however (see chart). One idea, to work together, has proved especially difficult. There were a couple of false starts—notably, New Century Network, a vaguely defined venture that brought together most of America's big newspaper publishers in 1995 but collapsed when different companies wanted to take it in different directions. Two more recent and more promising co-operative web operations are CareerPath, for classified job advertisements, and Classified Ventures, for other sorts of classifieds. Both outfits include the Tribune group, the New York Times, the Washington Post and others. A group of competing latecomers, including the Hearst and Advance newspaper groups, bought an online company called AdOne in January: it operates the ClassifiedWarehouse site.

Reclaiming classified advertising on the Internet may continue to elude newspapers. There is already a lot of competition—from fast-moving newcomers, such as Monsterboard in recruitment, from big Internet firms, including Microsoft's CarPoint.com and AOL's WorkPlace Channel, and from people who used to pay their dues to the newspaper business but now want to cut out the advertising middleman. Realtor.com, for instance, the most successful property site, is owned and run by America's realtors. Newspapers' sites are doing less well.

Surely, though, someone will have to direct traffic to all those classified sites out there? That, after all, is the newspapers' job in the bricks-and-mortar world: they put together packages of copy, which attract the viewers, who look at the advertising. Could they not do the same in this new medium?

A mile wide, an inch deep

Only with difficulty, because what newspapers offer is at once too deep and too superficial. Look, for example, at news consumption on the web, which is growing. A survey last year by Jupiter, a consultancy, showed that 12% of people looked to the Internet first for breaking news, more than those who turned to radio. But they do not want to read long articles; they want headlines, frequently updated. That is what television networks, which feed 24-hour news channels, do well. So do wire services, which provide news to big websites such as AOL and Yahoo!. Newspapers are way down the list of where people look for their news on the Internet. The top newspaper on the web, USA Today, ranks 19th in the news, information and entertainment category put together by Media Metrix, which monitors visits to websites. MSNBC is second, CNN is sixth and ABC News is 14th.

This should not, perhaps, surprise: news is not what people mostly read newspapers for anyway. According to research carried out a few years ago by Mercer Management Consulting, television and radio are more important sources of actual news. Newspapers are more prized for the information they carry about property, jobs, sports, entertainment, arts, food, relationships, women's issues and money.

Specialists on the web have been picking off those areas of the newspapers' business, and delivering more depth. So sports fans are more likely to turn to ESPN or SportsLine, or to their favourite team's website, than they are to a newspaper's site; women wanting to chat about women's things will go to women.com or iVillage; investors will go to E*Trade; and so on. As Paul Zwillenberg, an American who runs the online operations of Britain's Associated Newspapers, says, “the trouble with newspapers is that they are a mile wide and an inch deep. Websites that work best are an inch wide and a mile deep.”

What is more, in America, at least, the newspapers have missed the boat. Their job of bringing traffic to advertisers has already been taken by the “portals”. They are the Internet service providers or search engines— firms such as AOL, Yahoo! or Lycos—that regard themselves as the gateways to the web. Aside from AOL, which still lives mostly off subscriptions, the portals, like newspapers, make money by selling their traffic to other businesses, either through banner advertising or by offering live links that tempt visitors through to other sites. Even newspapers have to do such deals on the web.

America's newspapers still reckon that they have one big advantage: their local character. The Internet may be a global medium, but people's spending is mostly local. And nobody, the newspapermen argue, can do local the way they can. They believe that the links they have built up over decades with local advertisers will give their classified sites an advantage. In the six months after it rolled out cars.com on the Internet, the Tribune group signed on 131 car dealers in Chicago and Orlando who were already advertisers in its newspapers.

Of course, others too have spotted the potential in local markets. Sites such as Barry Diller's CitySearch and Microsoft's Sidewalk reckon to make money, in the long run, by packing together local information and pulling in local advertising and e-commerce. But the newspapers say they have a wealth of detail about local matters—school performance records, local crime reports—that is available to them virtually free because reporters need it as background for their stories. Anyway, they maintain, those nationally formatted services lack the local feel that people want. As David Hiller, senior vice-president of development at the Chicago Tribune, says, “Local takes a lot of feet on the beat. You can't do that from Redmond [Microsoft's home town].”

Yet it is not yet clear that local information will ever be a big draw on the Internet. The successful communities on the Internet, places such as Geocities and theglobe, divide people not by region but by interest—in music, say, or food, or homosexual sex. The Internet's defining characteristic is that it brings together people whom geography has kept apart. If people want to gather in local groups, a neighbourhood bar has many advantages over the Internet.

The best and the rest

So what does the cyberfuture hold for newspapers? Even if the Internet destroys the industry's economics, the demand for well-researched, well-written news and analysis will not disappear. If anything, it may increase. The easier it is to publish, the more rubbish will get published, and trusted newspaper brands may become more valuable.

The price of newspapers, however, is likely to rise, once the classified advertising that used to subsidise the copy has gone. How high prices go will presumably depend on how much a paper relies on classified. It is not clear that readers will want printed newspapers at any cost; it could well prove that they do not.

Big newspaper groups with lots of money and strong brands may find a partial solution to their problems by investing in web-based companies that overlap their existing businesses. The Tribune group has put money into companies such as food.com, a restaurant takeaway service that works well with the restaurant section in its city guide, and the New York Times has invested in Thestreet.com, an online financial news service.

Print can help to promote websites; websites can create value for companies with declining old-media assets. But print-based businesses are likely to go on shrinking nonetheless. And for lots of local newspapers, heavily dependent on classified advertising, there may not be a solution at all: they will most likely vanish, like horse-drawn streetcars, from the scene.